Tyler Cowen's Great Stagnation: The middle class is doomed.

Don't Worry, Be Unhappy

Tyler Cowen says the good times are over. Where have we heard this before?

The Wall Street Journal's Bob Davis and David Wessel are perhaps the two best business reporters working in newspapers today. In 1998 they published a book that Paul Krugman praised as "the best … I've ever read about how a changing economy affects the lives and work of real people." Its unblinkered reportage, sweeping historical research, and lucid analysis of previous economic trends make the book a compelling and informative read 13 years later. But when I tell you the title, you'll wince: Prosperity: The Coming 20-Year Boom and What It Means to You. Davis and Wessel argued that productivity gains from computers combined with rising enrollment in community colleges were poised to rescue the middle class from a quarter-century of economic stagnation. It didn't happen. You can buy Prosperity today for a penny.

The same puzzle lies at the heart of both books. Median family income, which more than doubled between 1947 and 1973, increased by less than one-quarter between 1973 and 2004. (Whatever gains have been made since then have been wiped out by the economic downturn in 2008.) Davis and Wessel argued, in effect, that America was catching its breath. American ingenuity in technology (computers, the Web) and education (community colleges that train workers for 21st-century jobs) would revive the economic fortunes of America's middle class. Cowen believes the opposite. As recently as the 1960s, the economy lifted the American middle class, but that stopped because a limit was finally reached. "We have been living off low-hanging fruit for at least three hundred years," Cowen writes. "We have built social and economic institutions on the expectation of a lot of low-hanging fruit, but that fruit is mostly gone."

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The low-hanging fruit, Cowen says, falls into three categories.

Free land. This became unavailable after the closing of the American frontier at the end of the 19th century.

Technological breakthroughs. Obviously these still occur, but none can compare to those of the late 19th and early 20th centuries: electricity, telephones, automobiles, airplanes, radio, TV, etc. Cowen reproduces a zany chart devised by a Pentagon physicist named Jonathan Huebner showing the per-person rate of innovation from the 15th century to the present; it peaked in 1873. In the U.S., the number of patents issued per capita fell for most of the 20th century. Innovations still occur, but they are no longer the kind that benefit society as a whole. They make Wall Street financiers rich. Or they make Steve Jobs or Mark Zuckerberg rich without creating much employment. The iPod has created fewer than 14,000 jobs in the U.S.; Facebook employs fewer than 2,000 people; Twitter, fewer than 300. More than one-quarter of Gross Domestic Product is spent on "government consumption" (i.e., what government does exclusive of entitlement spending); education; and health care. These economic sectors are at worst failing to contribute meaningfully to economic growth and at best are contributing to an extent that can't be measured.

Smart, uneducated kids. At the start of the 20th century, almost no young Americans—a mere 6.4 percent—graduated from high school, and well under 1 percent went to college. Today, three-quarters graduate from high school, and about 40 percent enroll in college. The high-school graduation rate peaked in the late 1960s, dropped a few percentage points in the 1970s, and has been stuck at the same level ever since. If you don't finish high school, you can't go to college.

Cowen's first piece of fruit—the American frontier—is pretty clearly gone, unless you want to talk about the distant possibility of space colonization. But it's not clear its disappearance is the brake on middle-class prosperity that he claims. After all, for most of the frontier-less 20th century, economic growth was both brisk and widely shared: Inequality either declined or failed to increase between the 1930s and the 1970s.

Cowen's second piece of fruit—technological innovation—may or may not resume delivering broad-based prosperity. Davis and Wessel were wrong to predict that computer technology was on the verge of boosting middle-class incomes, but Cowen seems equally wrong to suggest that computer technology is not on the verge of doing so. Indeed, Cowen eventually concedes that the Internet, by facilitating the spread of scientific learning, "may do more for revenue generation in the future than it has done to date." It's hard to know how to assess Cowen's views about the possible uselessness, economically, of existing spending on government consumption, health care, and education, because they're pretty vague.

Cowen's third piece of fruit—the possibility of large educational gains in the future—is the hardest to feel optimistic about, because we have been struggling for nearly half a century to improve educational outcomes, with little success. Cowen eventually tempers his pessimism on this point by noting that President Obama is getting tough on teachers unions. But I have my doubts that weakening teachers unions, whatever the merits of doing so, will do much to increase educational performance in the United States. My skepticism rests on two observations:

Teachers unions, under siege for three decades, have yielded again and again (not always willingly) to reforms such as merit-based pay and increased benchmarking of students through standardized testing. These reforms have produced strikingly little in the way of improved educational outcomes.

The degree to which other nations leave the United States well behind in educational achievement bears no apparent relation to how much teachers in those nations get pampered by labor-friendly government policies. In 2003, American 15-year-olds were ranked for reading skills in the middle third of member countries in the Organization for Economic Cooperation and Development, most of whose members are advanced industrial democracies, and in 2006, American 15-year-olds were ranked for math skills in the bottom fourth of the OECD. * If harassing unions is the answer, why are more labor-friendly nations like Canada, Germany, France, Sweden, and Austria kicking our asses in math? (I'd be tempted to argue that labor-friendly policies improve educational outcomes if it weren't also true that China, Russia, the Czech Republic, and assorted former Soviet republics are similarly besting U.S. performance in math.)

The data on international educational rankings are so dismal for the United States that they may provide a perverse basis for greater optimism. The wealthiest country in the world is doing such a poor job, relative to other countries, that there should be ample room for improvement. When, how, or whether that improvement actually comes is anybody's guess, though, as Davis and Wessel's educational predictions should serve to remind us. In 1998, they derived much of their optimism about the middle class's economic prospects from observing that college attendance by recent high-school graduates rose from 51 percent in 1982 to 67 percent in 1997, an increase they credited to the expansion of community colleges. But college attendance didn't rise after 1997, and the proportion of kids entering college who receive a degree has been declining. Only about 30 percent of first-time, full-time college students who enroll in community college acquire their two-year associate's degree within three years. Though for-profit colleges, which have arisen as an alternative to community college since Davis and Wessel published Prosperity, have more than doubled their enrollment, they have an even lower completion rate of about 22 percent.

Cowen ends his e-book with a few policy prescriptions, but they're absurdly halfhearted. Encourage free trade so Americans can "free up a lot of our time and energy for innovation." Confer higher status on scientists. (Cowen is outraged that few Americans have ever heard of the late Norman Borlaug, whose "Green Revolution" prevented famine throughout the Third World.) "Have realistic expectations." And remember all the ways Hitler, Stalin, and Mao turned the technological advances of the 20th century into "vehicles for oppression and mass murder." Cowen's core message is: Get used to economic stagnation, or what he calls "the new normal." It's a weird conservative echo of liberalism's era-of-limits gospel from the 1970s, articulated by the Club of Rome and other groups, the chief difference being that liberals used economic pessimism to sell wise environmental stewardship while Cowen is using it to sell complacency about the fate of the middle class. (In a recent essayin The American Interest, Cowen expressed indifference toward income inequality except insofar as it reflects perverted financial incentives on Wall Street.)

The phrase "era of limits" sounds quaint today because so many of the assumptions behind it proved false. The energy crisis, for instance, though judged more or less permanent as late as 1979, gave way to dropping oil prices and an eventual oil glut. The lesson is that when addressing the problems of the world, it makes sense to keep your eyes on the present rather than blur the picture with inevitably unreliable extrapolations to the future. Maybe the prosperity that Davis and Wessel predicted will come of its own accord (a few years behind schedule), but don't rely on it. Maybe the economic stagnation that Cowen says is our lot in life will persist, but don't resign yourself to it. If the middle class is suffering economically today—and it is—then the practical solution is to ease that suffering today. A crystal ball only gets in the way.

Correction, Feb. 23, 2011: This article originally failed to make clear that the 2003 ranking concerned reading scores while the 2006 ranking concerned math scores. (Return to the corrected sentence.)